European Markets, Fundamentals

European Stocks Close Higher Following Strong US Data

Europe Session Key Developments

• Concern in Financials Remains High on RBS Breakup
• Earnings Data Shifts Sentiment

European markets closed higher following mixed movement in the morning while strong US data led to optimism in the final hours of trading. Economic releases including pending home sales and an index on manufacturing in the world’s largest economy buoyed prospects that the recent correction in markets is not based on an uneven recovery. As risk appetite returned to the forefront, dollar weakness led the tide with commodity prices rising off recent lows. News out from Europe also raised sentiment as house prices climbed in the U.K. for the third month, while October PMI readings came in better-than-expected. Elsewhere in the world, PMI in China posted acceleration in the rate of growth while Australia’s Treasury raised its economic outlook. While fundamentals appear to remain strong, news within companies was mixed. US automaker Ford, which receives much of its sales in Europe from models such as the Ford Fiesta and others, posted a surprise profit of nearly one billion dollars. Relating closer to the mainland, Germany’s second largest lender, Commerzbank, posted an unexpected loss of €1.05B on restructuring costs from its acquisition of Dresdner along with a writedown on the value of Eurohypo, its commercial-property unit. Other news affecting the trade included financial concern as British banks including Royal Bank of Scotland, Lloyds, and Northern Rock, are likely to be broken up by the EU following recent similar action with Dutch financial giant ING Groep. Ultimately, markets have corrected a fair bit off their highs and recovery today does not fully indicate the end of a correction. Stocks have seen similar sized contractions since July however, and all were notably brief and quickly recovered from. It remains to be seen whether the current downswing is one which will continue through to the year-end or whether sidelined liquidity will quickly fill the gaps.

FTSE 100              5,104.50           +59.95                     +1.19%
British stocks rose the most of the five majors as significant gains were fueled by a 3.79% rally in Basic Materials. A boost to copper and other prices led to the advance as global data including rising Chinese PMI and Australia’s higher outlook helped to lift speculation. Initial concern in the financial sector largely faded away from the broad group, which ended up, while several major firms including government supported Royal Bank of Scotland and Lloyds closed lower, down 7.8% and 2.33% respectively. Leading the advance were moves of approximately 5% across miners including Eurasian Natural, Vedanta and Lonmin. Ultimately, recovery in commodity prices off recent weakness may help to continue propelling the FTSE to outperform indices in Germany and elsewhere.

CAC 40                    3,639.46          +31.77                    +0.88%
French equities rose nearly one percent as gains were noted in eight of ten sectors with a rise of more than one percent seen in six sectors following a finalized PMI that showed the nation’s manufacturing expanded at the fastest pace of the five largest European nations. Automaker Peugeot rose the most by more than four percent following an increase in French car registrations by 20% and firm sales improvement of 22%. Earnings strength in US automaker Ford also raised sentiment that the sector is recovering quickly as consumers return to spending large durable goods. Also leading was BNP Paribas, up more than three percent as the nation’s largest bank is likely to purchase bonds with face value of €226.3 million from Spanish based UCI at a discount between 67 and 95 cents on the dollar.

DAX                           5,430.82          +15.86                    +0.29%
German stocks closed up the least of the five majors as only the Technology sector managed to gain more than one percent. Just over half of stocks traded higher while the finalized reading for German PMI came in just a hairpin off the initial figure. As the German economy is highly focused on exporting, demand noted in figured such as the Baltic Dry Index as well as regional trade reports will need to be closely watched to gauge improvement. The Baltic Dry Index, a measure of shipping prices for commodities has risen sharply since early October over 3100 from just above 2500. Meanwhile, demand appears to be growing in exports and imports in nations including China and the US. Fundamental improvements bode extremely well for Germany, while the index remains nearly 8% off its recent highs.

IBEX 35                  11,465.80         +51.00                  +0.45%
Spanish equities closed higher by nearly half of one percent as gains were noted across seven of nine sectors. Advances proved limited with no stock seeing an increase of two percent or more while losses also were minimal. Today’s recovery leaves the index still down more than four percent from recent highs, while the year-to-date increase in the IBEX remains the largest of the five majors at nearly 25%. Ultimately, confidence in Spain’s financial sector is higher than elsewhere in Europe as the nation’s main banks, BBVA and Santander, were less exposed to the financial crisis and prior asset price bubble. Consequently, lending in the recovery should be vibrant and the country may experience quicker growth than its counterparts elsewhere.

FTSE MIB              22,298.31         +237.98                 +1.08%
Stocks in Italy rose more than one percent while falling intra-day to the lowest level since early September. As financial fears spread of increasing capital and government interventions in the industry including breaking up major firms, the index has fallen sharply off its highs by as much as more than 10%. The FTSE MIB temporary broke below 22,000 again today as bearish sentiment remains large. Major movers overall included a 3% rise in automaker Fiat as French carmakers report higher sales and Ford surprised with profit in the third-quarter. Banks posted moderate improvement with Italy’s largest lender, UniCredit, up 1.5% as Fondazione Cariverona, the largest shareholder in the bank, will support plans by the firm to raise capital.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com